This invention concerns a computer method and system for processing financial securities and instruments. More particularly, this invention accurately determines the after-tax proceeds an investor could expect to have at the end of a holding period for each of a set of investment strategies involving options, and determines an optimal strategy for maximizing such after-tax proceeds.
Taxation is a significant concern to investors and others who are evaluating capital investment transactions such as buying or selling a stock. A transaction that appears to yield a certain before-tax profit may prove less profitable than anticipated after taxes are assessed. Similarly, a transaction that appears to produce a financial loss may actually prove to be less of a loss when tax-losses are offset against capital gains and the liquidated capital is re-invested.
Frequently an investment is sold to re-invest the proceeds in another potentially more profitable capital investment vehicle, and so not merely to liquidate profits. However, the consequences of selling a currently held investment instrument to buy an alternate instrument can only be accurately evaluated by knowing the tax consequences of the transaction in advance. This is particularly true under most capital gain taxation regimes because different, usually lower, tax rates are applied when the investment is held for longer periods. Under some capital gains tax laws the tax rate may be reduced after a specified holding period, such as one year.
Investors and others who manage financial transactions need to be able to assess the after-tax consequences of potential transactions. More importantly, they need to be aware, a priori, of the after-tax consequences of a potential transaction in order to make informed investment decisions that optimize after-tax profits. In order to produce optimal after-tax results, the consequences of each transaction must be made in light of an investor's past and current transactions, the available investment alternatives, their tax bracket, and other factors.
A need exists for a system or method which finds optimal solutions to after-tax investment yields. Previous investment analysis mechanisms have not adequately taken into account the taxation profile and investment expectations of each individual investor, nor do they operate over an entire portfolio. In addition there is a need for a system or method which allows users to make a priori and “what if” calculations to guide their investment decisions.
One known method that attempts to solve the capital gains tax problem is called tax efficiency. Tax efficiency strategies approach the capital gains taxation problem by adopting a low turn-over strategy, where investments are held for periods that are at least long enough to lower the capital gains tax rates. Typically, under the tax efficiency investment discipline, an investor selects low dividend instruments and holds these instruments long enough to avoid higher capital gains rates. This approach, as titled, may be efficient in that it attempts to reduce the tax consequences of investing. However, in doing so, it eliminates the potential of achieving the highest level of after-tax proceeds, by not assessing if and when a stock which should be sold prior to the long-term window, in order to optimize the highest returns by calculating the economic break-even point of advantage.
Accordingly, a need exists for a system or method which takes such re-investment considerations into account.
In addition, in the prior art, when options and other derivative rights are involved in investment planning, many financial advisers and options holders refrain from exercising options in the mistaken belief that retaining options is more profitable. In fact, retaining options may, in some investment strategies, be less profitable, including in light of after-tax determinations. More often, such failures to exercise options occurs since financial advisers and options holders do not perform sufficient, if any, calculations to determine the after-tax effects and proceeds involving exercised and non-exercised options. In the prior art, such advisers and/or options holders would not perform such calculations, since the calculations are viewed as being too complicated with too many and unmanageable ramifications stemming from the exercise or non-exercise of options. In addition, in the prior art, the after-tax effects and proceeds involving options has not been performed on a micro-basis over a plurality of strategies, for example, since such analyses are considered too complicated.
A need exists for a system and method for determining optimized investment strategies involving options and/or other derivative rights.